Statement on “The Role of Public Employee Pensions in Contributing to State Insolvency and the Possibility of a State Bankruptcy Chapter”

February 14, 2011

Submitted by NEA to the Committee on the Judiciary Subcommittee on Courts, Commercial and Administrative Law

The National Education Association, representing 3.2 million public educators working in classrooms across the country, opposes any proposal to allow states to declare bankruptcy to avoid their pension obligations. This dangerous and unnecessary proposal threatens the retirement security of millions of public employees who have dedicated their lives to serving their communities and have earned the secure and modest retirements they have been promised.

Public pension plans are not in crisis. Participants do not all retire on the same day and draw down their pensions. On the contrary, pensions are funded and paid out over decades. Pension liabilities are being misused by opponents of public pension plans to confuse the long-term nature of pension obligations with short-term debt obligations. They have created the misguided impression that drastic and immediate measures are needed to avoid an imminent fiscal meltdown. The truth, however, is that public employee retirement systems have substantial assets. States and localities have the next 30 years in which to remedy any pension shortfalls.

Allowing states to avoid paying pension benefits by declaring bankruptcy would be unfair to those who have forgone higher salaries in order to work in the public sector, counting on their pensions to ensure a secure retirement. In addition, it would be costly and could have unintended consequences as retirees who do not receive their expected pension benefits could be forced to depend on social programs to meet basic needs.

States who declare bankruptcy and that seek to breach their obligations to pensioners by doing so, would undoubtedly be faced with extensive constitutional litigation over the resulting impairments of contracts. Such states could also find themselves unable to secure financing and float debt in the future. This could put at great risk essential infrastructure needs, including building and repairing school facilities.

State leaders have not asked for the authority to declare bankruptcy. In fact, the National Governors Association has cautioned that “the mere existence of a law allowing states to declare bankruptcy only serves to increase interest rates, raise the costs of state government, and create more volatility in financial markets.” And, in a February 4 letter, the NGA and National Conference of State Legislatures stated, “The reported bankruptcy proposals suggest that a bankruptcy court is better able to overcome political differences, restore fiscal stability, and manage the finances of a state. These assertions are false and serve only to threaten the fabric of state and local finance.”

Allowing states to declare bankruptcy is a highly risky and unnecessary step for addressing state fiscal needs. We urge Congress to reject any such proposals and, instead, to work with state officials to find more appropriate ways to ensure our prosperity for the future.

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